Banking Industry

1. A commercial bank is a financial institution which performs the functions of accepting
deposits from the general public and giving loans for investment with the aim of earning
profit.
Nationalized Commercial Banks (NCBs) were established in Bangladesh in 1972 through
amalgamation of twelve commercial banks that were operating in pre-independent Bangladesh
allowing the poor access to fund, reducing capital flight to foreign countries, and increasing
domestic investment were some of the basic objective of this nationalization.
After the independence, banking industry in Bangladesh started its journey with 6 Nationalized
commercialized banks, 2 State owned Specialized banks and 3 Foreign Banks. In the 1980's
banking industry achieved significant expansion with the entrance of private banks. Now, banks
in Bangladesh are primarily of two types:
 Scheduled Banks: The banks which get license to operate under Bank Company Act,
1991 (Amended up to 2013) are termed as Scheduled Banks.
 Non-Scheduled Banks: The banks which are established for special and definite objective
and operate under the acts that are enacted for meeting up those objectives, are
termed as Non-Scheduled Banks. These banks cannot perform all functions of scheduled
banks.
There are 57 scheduled banks in Bangladesh who operate under full control and supervision of
Bangladesh Bank
 State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or majorly
owned by the Government of Bangladesh.
 Specialized Banks (SDBs): 2 specialized banks are now operating which were established
for specific objectives like agricultural or industrial development. These banks are also
fully or majorly owned by the Government of Bangladesh.
 Private Commercial Banks (PCBs): There are 40 private commercial banks which are
majorly owned by the private entities. PCBs can be categorized into two groups:
 Conventional PCBs: 32 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i.e. interest based operations.
 Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and
they execute banking activities according to Islami Shariah based principles
 Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of
the banks which are incorporated in abroad.
 There are also 6 Non-scheduled banks

2. Functions of Commercial Banks
Commercial bank’s functions can be categorized into two types-
1. Primary or Principal Function
2. Secondary or Ancillary Function
Primary function of commercial banks are of three types:
1. Acceptance of Deposit
2. Lending
3. Investment
Secondary functions are of two types:
1. Agency Services
-Collection & payments of cheques
-Standing Instruction
-Acting as correspondent
-Collection of utility bills
-Purchase and sales of stocks
2. Miscellaneous or General Services:
-Safe custody of valuables for clients
-Lockers for clients
-Remittance facilities-DD,TT,MT and PO
-Advisory services
-Providing credit reports
-Opening L/Cs
-Issuance of travelers’ cheques
-Delivering foreign-trade related services
-Others services, e.g., issuance of debit/credit card, on-line banking etc.
-Cash management function
-Security brokerage function
-Merchant banking function
-Act a guarantor

3. Important Roles of Commercial Banks in Bangladesh
1. Mobilizing Saving for Capital Formation:
The commercial banks help in mobilizing savings through network of branch banking. People in
developing countries have low incomes but the banks induce them to save by introducing
variety of deposit schemes to suit the needs of individual depositors. They also mobilize idle
savings of the few rich. By mobilizing savings, the banks channelize them into productive
investments. Thus they help in the capital formation of a developing country.
2. Financing Industry:
The commercial banks finance the industrial sector in a number of ways. They provide short-
term, medium-term and long-term loans to industry.
3. Financing Trade:
The commercial banks help in financing both internal and external trade. The banks provide
loans to retailers and wholesalers to stock goods in which they deal. They also help in the
movement of goods from one place to another by providing all types of facilities such as
discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.
Moreover, they finance both exports and imports of developing countries by providing foreign
exchange facilities to importers and exporters of goods.
4. Financing Agriculture:
The commercial banks provide loans to traders in agricultural commodities. They open a
network of branches in rural areas to provide agricultural credit. They provide finance directly
to agriculturists for the marketing of their produce, for the modernization and mechanization of
their farms, for providing irrigation facilities, for developing land, etc.
5. Financing Consumer Activities:
People in underdeveloped countries being poor and having low incomes do not possess
sufficient financial resources to buy durable consumer goods. The commercial banks advance
loans to consumers for the purchase of such items as houses, cars, etc. In this way, they also
help in raising the standard of living of the people by providing loans for consumptive activities.
6. Financing Employment Generating Activities:
The commercial provide loans for the education of young person’s studying in engineering,
medical and other vocational institutes of higher learning. They advance loans to young
entrepreneurs, medical and engineering graduates, and other technically trained persons in
establishing their own business.
7. Help in Monetary Policy:
The commercial banks help the economic development of a country by faithfully following the
monetary policy of the central bank. In fact, the central bank depends upon the commercial
banks for the success of its policy of monetary management in keeping with requirements of a
developing economy.

4. Overview of Bangladesh Banking Sector
KEY TAKEAWAYS
• Mobile Financial Service, Agent Banking and Digital Payment have made tremendous progress
in terms of achieving greater financial inclusion in the country.
•During 2012-2016, a shift in the aggregate income mix of the banking sector was observed as
the share of net interest income in total operating income declined.
•Lower provisioning despite growing NPL inflated aggregate net income of the banking sector
during 2012-16 even though aggregate profit before provision remained flat.
•Given the high level of NPL in the system, the capital buffer to withstand any sudden
deterioration of asset quality is lacking in Bangladesh.
•Only 20% of the loans written-off by the banks have been recovered in the last 12 years,
indicating the poor recovery ability of the banks.
•The recent amendment to the Bank Company Act is expected to lead towards further
consolidation of power in the hands of too few.
•Overall, the magnitude of the problem in the banking sector is still at a manageable level.
However, the regulators cannot afford further denial and must take preemptive actions to
reform the system when there is still time.
Key Milestones in Financial Inclusion
1. The reach of banking service in Bangladesh has seen satisfactory progress through expansion
of bank branches. Number of bank branches stood at 9,654 in December 2016 against 7,961 in
December 2011.
2. Agent banking, introduced in 2013, has seen tremendous growth in client acquisition.
Through agent banking, fresh deposits worth USD 115 million and loan disbursement worth
USD 10 million were made in rural and previously unbanked areas (Agent Banking Activities,
March 2017).
3. Mobile Financial Service (MFS) has posted staggering growth since its introduction in mid-
2011. The services offered by MFS companies have facilitated faster transaction throughout the
country.
4. Shifting trends have been observed in the mode of transaction. Usage of plastic money has
grown at unprecedented rate facilitated by a tech-savvy urban consumer base and proliferation
of E-commerce.
5.100% of the private commercial banks in Bangladesh have adopted Core Banking Solution
(CBS) to offer seamless service to the clients from any branch of a certain bank Bangladesh
Bank, in 2016, took one step further by introducing a uniform Core Banking Solution, which
would offer greater risk-monitoring ability to the regulators and stakeholders.

5. Key Attention Areas in the Banking Sector
ASSET QUALITY
Non-performing loans in the banking system have outpaced the credit growth in the last five
years. As of 2016, stressed advances (NPL + Restructured Loans + Rescheduled loans) in the
sector stood at 17% of total outstanding loans. In absolute terms, the size of NPL stood at USD
7.8 billion and that of restructured and rescheduled loans at USD 6.7 billion. At the same time,
provision coverage exhibited a declining trend, indicating enhanced vulnerability of the sector.
Although the NPL scenario in the SCBs gained more attention from different corners, the asset
quality in the PCBs has also deteriorated to a serious level. In the last five years, NPL at PCBs
grew at a faster pace than that of the SCBs. Poor risk assessment of credit, subdued demand in
the economy, rescheduling facilities to known defaulters, and mostly the culture of borrowers’
unwillingness to repay loans were the major reasons behind the deterioration of the asset
quality in Bangladeshi banks.
CAPITAL ADEQUACY
The banking sector in Bangladesh has the highest share of NPL and the lowest Capital Adequacy
Ratio compared to its peer economies. Considering the high level of NPL in the system, the
buffer to withstand any sudden deterioration of asset quality is lacking in Bangladesh. Despite
the generous recapitalization of SCBs for the past nine years with taxpayers’ money, there has
been no material improvement in these banks’ capital position, asset quality and profitability.
While the PCBs have maintained sufficient capital above the regulatory requirement, the major
risk to their capital position is the solvency of the top borrowers at these banks. According to a
stress test done by the Central Bank, default of top 3 borrowers in each of the banks would
make 50% of the banks non-Compliant in maintaining the minimum regulatory capital.
FRAGMENTATION AND LACK OF INNOVATION Compared to the banking sector of its peer
economies, the banking sector in Bangladesh is highly fragmented. Burdened with unrealistic
‘business targets’, banks involve in unhealthy competition and often provide cheaper credit to
an already struggling customer. Besides, the pace of innovation remains strikingly low in the
banking sector. Although 17 banks were granted the license to operate Mobile Financial Service
(MFS) in the country, the number of full-fledged MFS providers remains far below that. Further
problems have been created by the new banks, some of which are already under special
observation just within four years of commencement. Specialized banks created to foster
agricultural lending and mobilizing investments from non-resident Bangladeshis put up a
disappointing performance in achieving their respective

6. The Way Ahead
DEVELOPING PRUDENTIAL REGULATIONS
•To ensure a sound regulatory environment, policies must pressure.
•Bangladesh Bank must build its capacity in forecasting and assessing risks associated with
various sectors to develop proactive policies.
•The Central Bank should establish a strict monitoring cell to prevent the misuse of low
provisioning requirement for priority sectors such as SME.
•The Credit Rating Agencies in Bangladesh should involve in independent due diligence to
evaluate the health of the banks and companies.
•The progress made by the new banks in terms of achieving their original objectives needs to
be carefully evaluated. These banks should be strictly monitored so that they remain within
their mandated business categories.
BOLSTERING CORPORATE GOVERNANCE
•While the representation of family members in the board of a family-owned bank cannot be
eliminated, checks and balances need to be in place to ensure the welfare of shareholders and
depositors.
•The Central Bank should disclose the deviation between loan provisioning figure arrived by the
Central Bank and external auditors to reduce information asymmetry about the health of the
banking sector.
•Boards should shift away from rewarding management based on short-term performance, a
practice that motivates excessive risk-taking to showcase unsustainable profit boost.
IMPROVING ASSET QUALITY
•Rescheduling and restructuring facility to habitual defaulters should be stopped completely.
Exemplary measures must be taken to dissuade such behavior.
•Banks should reform the archaic collateral policy and give more weight to the liquidity of the
underlying collateral while sanctioning a loan.
•Adoption of a dynamic loan-loss provisioning policy should be adopted to increase loss
provisioning for exposure to risky sectors on a ‘proactive’ basis.
•To facilitate speedy asset recovery process, specialized Asset Restructuring Companies might
be established. Besides, banks should develop more effective non-legal measures such as
regular visits to recover assets.
STRENGTHENING CAPITAL BASE
•The issuance of subordinate bonds needs to be monitored carefully. Interest rate on
subordinate bonds should reflect the risks associated with the issuer bank.
•Recapitalization of state-owned banks with the taxpayers’ money should be terminated. The
Government should take bold steps to restructure the management and the business model of
these banks
PROMOTING INNOVATION
•Banks need to focus on the shifting trends in the economy and develop innovative deposit and
loan products for corporate and retail customers.
•Investments must be made in technology to digitize service delivery channels and risk-
monitoring system of the banks.

7. Assignment
On
Commercial Banking Sector in Bangladesh
Prepared For
Palash Saha
Course Instructor
Financial Institutions and Markets, Fin-402
Prepared By
Asrafuzzaman
ID 1907
BBA 25th
Batch
Institute of Business Administration
Jahangrinagar University
Date of Submission
1st
July, 2018